Why Stocks Are Ignoring All Reliable Market Indicators, and How to Trade Anyway

Consider this: Stocks are actually cheaper now than they were in 2007.

"There were times when my plans went wrong and my stocks did not run true to form, but did the opposite of what they should have done if they had kept regard for precedent." So said Jesse Livermore, as chronicled in the brilliant book Reminiscence of a Stock Operator by Edwin Lefever. Stock market historians will recall that Jesse Livermore is still considered one of the most colorful market speculators of all time. Indeed, the "boy plunger" was blamed for the market crash of 1929 and for precipitating every market swoon from 1917 to 1940. Jesse's investing success was driven by his ability to develop certain indicators, combined with an investing discipline that spawned such market axioms as:

1. Fear your losses and let your profits run.

2. It was never my thinking that made me money, but my sitting tight.

3. Markets are never wrong, opinions are.

4. The tape knows all.

Years ago, I studied the tactics of Jesse Livermore, along with a number of other stock market operators, and have found many of those strategies to be as valid today as they were decades ago. I was reminded of the Livermore quotes while rereading an interview with market guru Justin Mamis. That interview was conducted by Kate Welling, who hangs her hat at the venerable firm of Weeden & Company.

The comments in the article that caught my eye were when Kate said to Mr. Mamis, "I detect a little frustration in your voice." Justin responded, "The frustration, for me, is that I have lost almost every meaningful indicator that I use to follow the markets because of changes in the nature of the business. People – and institutions – simply are not trading or investing the way they used to. It's part and parcel of how dramatically the business has changed, of the way so many hedge funds and trading desks work these days." To me, those comments were akin to Jesse Livermore's quote: "There were times when my plans went wrong and my stocks did not run true to form, but did the opposite of what they should have done if they had kept regard for precedent." With that thought in mind, I decided to examine the current stock market environment.

Potentially, it really could be different this time given that the S&P 500 (INDEXSP:.INX) has rallied for 501 calendar days without a 10% correction. That places the current rally within the top 10 longest such skeins since I started keeping notes in the 1960s. To size that, it should be noted that the longest occurrence, at least as chronicled in my notes, came between October 11, 1990 and October 7, 1997 encompassing 2,553 calendar days accompanied by a gain of 232.7%. Also in the "different" camp is that since last September's reaction high (1465.77), the SPX is better by 4.1%, but the usually market-leading technology sector, as measured by the Technology Select SPDR Fund (NYSEARCA:XLK), has fallen by more than 6%.

Then there is my "day count" sequence, which has served us pretty well over the years. To reiterate, buying stampedes typically last 17 to 25 sessions with only one- to three-session pauses and/or pullbacks before they exhaust themselves on the upside. It just seems to be the rhythm of the "thing" in that it takes that long to get everyone bullish enough to throw in their "bear towels" and buy right in time to make a trading top. While it's true some stampedes have lasted 25 to 30 sessions, it is very rare to have one extend for more than 30 sessions. In fact, I can count the number of them on one hand with the longest lasting 53 trading sessions (August 2006 – October 2006); and the next longest being the 38-session march into the August 1987 "top." For the record, today is session 34 since this stampede began on December 31.

To be sure, in recent weeks, "There were times when my plans went wrong and my stocks did not run true to form, but did the opposite of what they should have done if they had kept regard for precedent." Clearly, the stock market has ignored various overbought readings, has shrugged off bad economic news, and doesn't seem worried about the upcoming sequestration. Meanwhile, advisors' and investors' sentiment readings have only been this bullish three other times in the past 25 years (that's supposed to be a short-term negative), money flows into equity-centric mutual funds and ETFs are at decade highs (also a short-term negative), according to the NAAIM survey investment managers are the most leveraged into stocks on the long side that they have ever been, and the list of cautionary flags goes on.

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